The Indonesian economy cannot be separated from BI interest rates. Starting from bank interest and the price of basic necessities, everything depends on the BI interest rate. Currently, the new benchmark interest rate used by the government is the BI-7 Day Reverse Repo Date (BI7DRR). Effective August 19, 2016, this policy was used to replace the BI Rate as a measure to strengthen the monetary operating framework.

Through this new policy, the bank now does not have to wait a year to be able to withdraw the money. It only takes a minimum of 7 days, the bank can withdraw the money that has been deposited at Bank Indonesia (BI). After knowing briefly about BI interest rates, have you ever wondered when BI interest rates are regulated and what are their functions?

Let’s find out the full answer through the discussion in this article!

  • What is BI Interest Rate?
  • BI Interest Rate Function
  • BI Interest Rate Increase in 2022
  • Influence and Impact of BI Interest Rate Increase

What is BI Interest Rate?

BI interest rate is a policy for determining the reference interest rate determined by Bank Indonesia. Fluctuating in nature, BI interest rates are usually set and change every month. The determination is made through a meeting of the board of governors taking into account the condition of the Indonesian economy and the global economic market.

The BI rate has a close relationship with monetary policy that will be applied to all Indonesian people. One of them, the results of the board of governors meeting will affect interest rates for all banks in Indonesia.

One more thing you must understand is the BI interest rate. The BI rate is a reference for Bank Indonesia’s transactions with third parties such as the government and foreign parties. There are 2 types of BI interest rates, namely the buying rate and the selling rate of foreign exchange (foreign currency) against the rupiah. As is often seen in the news, the BI interest rate changes every day and is announced at 08:00 WIB every working day.

BI Interest Rate Function

After knowing the meaning, now you have to understand how the BI interest rate is very important in economic activity and state finances. There are several crucial functions of BI interest rates, including:

1. Controlling Inflation

If not controlled, high inflation can bankrupt a country as happened in Sri Lanka a few months ago. The circulation of money that is too high and the imbalance of demand and supply of goods or services are some of the factors causing inflation.

Therefore, BI interest rate regulation is needed to control inflation. In simple terms, if there is too much money in circulation, the government tends to increase the benchmark interest rate so that people are expected to save their money in banks or deposits.

If the money supply decreases, the demand for goods or services also decreases, causing the price to fall and suppressing inflation because people can reach basic needs. However, on the negative side, an increase in the benchmark interest rate makes interest rates on loans such as mortgages rise.

2. Maintaining the State’s Economic Stability and Growth

BI interest rate determination regulates the amount of money circulating in the community. When the economy looks sluggish, BI can lower interest rates so that more business actors are encouraged to take loans and hope that the wheels of the economy can continue to spin. This condition was seen in the early days of the pandemic where the decline in the benchmark interest rate helped micro and MSMEs.

3. Preventing Banking Fraud

Another very important function of the BI interest rate is to prevent banks from committing fraud or fraud in determining the amount of loan interest. With this regulation, banks cannot set loan interest according to their heart which has the potential to disrupt the economy and make it difficult for the community. Therefore, with the existence of a limit, banks cannot be too low or high in setting interest rates because they are monitored by BI.

4. Controlling People’s Consumption Passion

In line with the first point, an increase in BI interest rates tends to make the prices of goods or services fall, thereby increasing people’s buying interest. For example, when BI interest rates rise, people will tend to keep their money in banks and refrain from making credit loans. This will make a number of prices of goods and services fall so that it is expected to increase people’s purchasing power.

BI interest rates can affect mortgage rates. If you are planning to buy a house with a mortgage, it’s a good idea to start looking for a house now before the BI rate hike gets higher. Check the list of residences in the Bojong Gede area for under IDR 500 million here!

BI Interest Rate Increase in 2022

From the previous point, you now understand more about the function of the benchmark interest rate set by Bank Indonesia. So what about the current state of interest rates?

Launching the official website of Bank Indonesia, the results of the BI Board of Governors Meeting on 19-20 October decided to increase the BI-7 Day Reverse Repo Date (BI7DRR) by 50 bps to 4.75%, the Deposit Facility interest rate by 50 bps to 4.00%, and the Lending Facility interest rate of 50 bps to 5.50%.

The decision was taken as a front loaded , pre-emptive , and forward looking step to reduce inflation expectations which are currently too high ( overshooting ). In addition, this is also done to ensure that core inflation will return to the target of approximately 3.0±1% earlier in the first half of 2023 and strengthen the rupiah exchange rate stabilization policy due to global financial market uncertainty.

The policy of increasing the benchmark interest rate has been carried out by the government since several months ago. In August, BI raised interest rates by 25 bps and again raised 50 bps in September 2022. Meanwhile, in July, the government did not raise the benchmark interest rate and remained at 3.50%.

Effects and Impact of BI Rate Increase

Rising BI interest rates certainly raises pros and cons. BI’s decision to continue to raise interest rates since August is considered by the Executive Director of the Center of Reform on Economics (CORE) Mohammad Faisal to have an impact on the community. Launching CNNIndonesia.com, here are the effects and impacts of rising BI interest rates:

1. Interest on Bank Loans and Mortgages Rises

Even though the deposit interest rate increased, the increase in the benchmark interest rate made the loan interest rate also increase. Some goods loans such as home mortgages and motor vehicles will also experience a surge. The problem of home ownership has been a long-standing issue because the high house prices are considered not in line with the increase in wages. With the increase in interest rates, it is predicted that the community, especially the younger generation, will find it increasingly difficult to own a house.

2. Growth of the Real Sector is hampered

The real sector is a sector that is in direct contact with economic activities in the community. Some examples include the agricultural industry, mining, other processing. According to Faisal, an increase in BI’s interest rate will slow down the sector’s growth due to hampered fund distribution.

3. Credit Disbursement Drops

According to Faisal, the effect of monetary tightening occurred since after July. When BI maintained its benchmark interest rate for the month, the growth rate of bank credit was still fairly good and reached 10 percent. He estimates that credit growth and distribution will also fall below 10 percent.

4. New Job Opportunities Are Reduced

Due to rising loan interest rates, the business sector will also refrain from borrowing capital in order to avoid high interest rates. This condition resulted in a tightening of business finances so that the absorption of labor was also reduced. It is estimated that business actors will divert their capital for other purposes than hiring new employees.

5. People’s Savings Rate Increases

Even though it is negative in terms of credit, the increase in BI interest rates is predicted to make people allocate their money for savings. Therefore, people’s consumption behavior will shift from previously spending money to saving. Unfortunately for business owners, this becomes a bit of a threat because the level of sales can decrease due to decreased purchasing power.